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CO2 collapses to all-time low

Is CO2 dead? This is something I have been warning for a few years now. The evidence is overwhelming. Flawed concept, massive oversupply of permits and politicians optimistic predictions. Great combination.

Now UBS has published a quick update on CO2 this morning given the price has reached an all time low of €4.9/mT.

2013 carbon price closed Friday at just above €5, an all time low for the third consecutive day and carbon is down 25% YTD (see chart, courtesy UBS)

Despite the end of Free CO2 allocations for Western European Power Generators the market still seems to be massively oversupplied – UBS estimates the oversupply will last until 2025 (under the current EU ETS)

With the current emissions cap (1.74% reduction pa) ETS will be long each year until 2025 and it will take until 2045 before the current 1.5bn tonnes surplus inventory has been eliminated.

The elimination of free carbon allowances for most power generators has increased the volume supplied through primary auctions by over 4x. Hence the market reflects a better genuine supply/demand balance.

However, despite this Friday’s German auction which had to be cancelled due to lack of demand.

Possible Quick fix in H2?:

Both the EU Commissioner and the Irish EU presidency acknowledged last week that the future for the proposal to withhold allowances to prop up the price is uncertain. A decision is likely in H2.

UBS believes that EU Governments won’t support a measure which increases power price inflation and utility profits.

We also believe that Eastern European countries that have CO2 intensive economies are unlikely to be in favour of any type of measures to tighten the CO2 market.

In summary, governments will do again what they do best: mess up and try to intervene.

Negative for power prices

Remember that CO2 is a key driver of Continental European power prices. German power prices are set by coal generation (at the top of the merit order) which is high in CO2 emmissions. Thus Coal generation spreads benefit from lower CO2 vs. Gas and other fixed cost generation (Renewables and Nuclear) this depresses wholesale baseload power prices. No wonder German power prices are also at all-time low.

Pity that consumers don’t enjoy the benefit of low wholesale prices thanks to the enormous subsidies to renewables more than compensating the decrease in electricity, making consumer tariffs reach all-time highs as power prices collapse. Congratulations, another excellent EU policy.